Cambridge International as and a level Economics Ebook

 
in the form of coins and notes but 
the defi nition also includes
 
bank deposits, cheques, debit 
cards and credit cards. To be acceptable from a day-to-
day practical standpoint, money must also be portable 
and durable. However, money can also be in the form of a 
valuable commodity such as gold or platinum. In Russia, 
for example, oil has been widely exchanged for imports 
such as buses and trucks from Hungary or agricultural 
goods from Poland.
Economists also talk about 
near money
. Th
is is a term 
that is used to denote non-cash assets that can be quickly 
and easily turned into cash. Such assets include foreign 
currencies, savings accounts, bonds and certifi cates of 
deposits. As assets, they contribute to the 
liquidity
of 
banks by providing a supply of cash if this is needed to 
meet their 
liabilities
to depositors.
Near money: 
non-cash assets that can be quickly turned 
into cash.
Liquidity: 
the extent to which there is an adequate supply 
of assets that can be turned into cash.
Liabilities: 
debt obligations.
KEY TERMS
Where there is hyperinfl ation, as in Zimbabwe and 
Venezuela in recent years, people lose confi dence in 
money. Many farm workers, for instance, have preferred 
to be paid in produce as this will keep its value and can 
be easily swapped for other things such as cooking oil, 
sugar or bread. Th
e direct exchange of one good or service 
for another in this way is known as barter. Where this 
is the only way of exchange, then the process of trade 
and exchange becomes lengthy and diffi
cult. It is also 
very impractical since there must be a coincidence of 
wants, whereby both parties in a transaction actually 
have the goods or services that the other wants. Money is 
therefore essential if the processes of exchange and trade 
are to take place.
Zimbabwe’s descent into economic catastrophe was 
a long drawn-out aff air. Following a drop in agricultural 
production aft er controversial land seizures, exports fell and 
foreign investors went elsewhere. Th
e government sought 
to solve its liquidity problems by borrowing from foreign 
banks, knowing that it could not meet its loan repayments. 
Th
e government made the situation worse by printing more 
money, much of which was used to pay the army, police and 
civil servants. Eventually, infl ation reached more than one 
million per cent and local people lost all confi dence in the 
Zimbabwean dollar. More stability has come about since the 
country’s decision in 2009 to use the South African rand, 
the Botswana pula, the pound, the euro and the US dollar 
for all transactions.
Ten billion dollar note from Zimbabwe
Bearing the above in mind, economists recognise the 
following four essential functions of money:
1
A medium of exchange: Money is the ‘medium’, or form, that 
buyers use for purchases; sellers are willing to accept this 
medium in exchange for these purchases. By handing over 
money physically, or by transferring money electronically 
through the banking system, this is a common, automatic 
acceptance of money fulfilling this function.
2
A unit of account: Prices are quoted in terms of common 
monetary units. For instance, in the USA dollars and cents 
are used, while in Pakistan rupees and paise are used. 
This function is of relevance for current and future 
transactions since it is quite clear just how much money is 
required for a particular transaction. It also allows diff erent 
values to be added, measured and compared. Where money 
is borrowed, then the lender usually requires interest to 
be paid for this privilege. The ‘account’ aspect allows the 
sum of money to be recorded and for diff erent values to be 
added or compared.